Digitisation has taken the world by storm, with technology and advanced analytics penetrating every industry. This has rendered traditional banking systems obsolete, as BigTech and Fintech companies close in on the banking industry faster than ever. Banks are left with no option but to adopt digital banking in a major way if they hope to compete, and mass digitisation is no longer a choice but an inevitability, banks must now embrace digital banking.
Digital banking is not a fixed concept but a spectrum, and individual banks need to decide where on that spectrum they wish to place themselves. All of this is really a stepping stone to where the real future of banking lies - in platforms. The concept of Banking as A Platform (BAAP) is relatively new but has immense potential. Platform banking would provide a digital marketplace for banking (and perhaps even non-banking) services, increasing the limits of what it can provide. Yet, this objective is not easily achievable, and banks have many factors to consider before undertaking such an endeavor.
This article explores how incumbent banks can position themselves from the threat of entry of BigTech and Fintechs, and how they can give themselves the biggest advantages to stay on top.
Digital banking refers to the digitisation of banking services, thus eliminating the need for consumers to physically visit a bank branch. In the context of a global pandemic, traditional banking systems have become outmoded. Consumers want efficiency, accessibility, and demand essential banking services in a physically safe manner. This is where Big Tech firms and fintechs are giving traditional banks a run for their money.
Tech titans like Google, Facebook, Apple and Amazon are offering banking and financial services products directly to the consumer, at the tap of a button. Big Tech firms leverage their vast user base and can build on existing infrastructure to offer a wide variety of digital products and services to consumers. This poses a serious threat to traditional banks. While purely digital banks do exist (for example Revolut in the UK or Anglo-Gulf Trade Bank in the Middle East), incumbent banks are also choosing to adopt a more digital approach, and quickly, with hopes to compete. This is no easy feat and needs two seemingly contradictory objectives to be accomplished. On the one hand, banks need to achieve the speed, agility, and flexibility innate to Fintechs. However, at the same time, they must continue to manage the scale, security standards, and regulatory requirements of a traditional financial-services enterprise. This establishes a spectrum in digital banking, with different banks adopting digitisation to varying degrees.
There are several ways banks can mitigate the threat of new entrants in the financial services industry. Apple identified this opportunity by partnering with investment bank Goldman Sachs to launch the Apple Card, a revolutionary digital payments solution, which also avoided certain regulatory requirements. By relying on already existing banking infrastructure, tech companies can focus on what they do best - creating novel products - while still being able to compete with traditional banks - and an increasing number of companies now consider this to be the next logical step to add products to their core business models.
The FI-Fintech relationship creates a symbiotic ecosystem for both players to coexist and continue to stay relevant. In October 2020, HSBC launched Contour, a blockchain trade finance platform which is backed by Citi, HSBC and Standard Chartered. Similarly, JP Morgan is also launching a blockchain platform where they are now testing their digital currency- JPM coin - for the first time through a large tech client, in order to send payments across the world. This is indicative of how blockchain has become an important weapon in any digital banking arsenal, alongside concepts such as digital treasuries (for corporates) and digital wallets (for retail).
The true potential of digitisation is realised in Banking as A Platform (BAAP). BAAP enables third-party developers to build products and services for bank customers. Third parties can now extend platform functionality while the platform itself manages data exchange and oversees authentication. Equally importantly, it provides banks with an opportunity to build partnerships and reach new customers. With their recognisable brands and extensive ‘Know Your Customer’ research, banks can tap into a massive market.
Incumbent banks currently account for only 30 percent of the players in the BAAP market, in large part because of the enormous cost incurred by creating a platform. But, if they can combine the dependability associated with their names with new, innovative services and digital products, banks will place themselves ahead of the curve, and set themselves up for huge success.
It is evident that there are plenty of opportunities for banks to integrate and accelerate financial technology. Meanwhile, fintechs can use this opportunity to create new, innovative products for the new, modern, financially savvy retail and corporate consumer. However, the first, crucial step to this process is for traditional banks to identify their place on the digital banking spectrum; be it through FI-Fintech partnerships, BAAP, AI or blockchain, banks can formulate a clear strategy once they understand the digital banking spectrum.
The fintech revolution is set to continue to disrupt, and traditional banks must keep up with the pace of technology in order to stay relevant and competitive. In this rapidly evolving, ever-changing market, it’s time to innovate, integrate and accelerate into the future.
Fintech and Financial Services Legal Leader, PwC Legal Middle East
Tel: +971 (0)54 791 5255
Director, PR & External Communications Leader, PwC Middle East
Get in touch with the PR team, PwC Middle East